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Season 1, Episode 35

ACQ2 Episode

April 11, 2017
January 6, 2019

Ben & David transcend the barriers of "real" reality, and dive into Facebook and Mark Zuckerberg's geek-eutpoia vision of the future of gaming, social, and maybe even the entire internet: strapping goofy-looking goggles to your face. Is VR for real this time or are we living through another Virtual Boy moment? Tune in to find out!

Topics covered include:

  • Oculus's origins in 2010 as a twinkle in the eye of the then-17 year old VR wunderkind, Palmer Luckey, who started by prototyping VR headsets in his parents' garage in Southern California 
  • Palmer's time interning at USC's Institute for Creative Technologies, and chronicling of his own VR efforts in the Meant to be Seen 3D internet forums
  • Legendary game developer John Carmack's own interest in virtual reality, his intersection with Palmer on the MTBS3D forums, and how he acquired and popularized one of Palmer's first early prototypes of the Oculus Rift (which was literally held together with duct tape!) by demonstrating it onstage at E3 2012 
  • How former Scaleform cofounders Brendan Iribe and Michael Antonov teamed up with Palmer after E3 to create the company Oculus VR
  • The newly-formed Oculus's wildly successful August 2012 Kickstarter campaign, including video endorsements from both Carmack and Valve founder Gabe Newell
  • Oculus's subsequent venture capital fundraisings, and catching the attention of Facebook and Mark Zuckerberg 
  • Facebook's acquisition of the company in March 2014 for $2.3B
  • The Zenimax lawsuit filed against Oculus and Facebook following the acquisition 
  • Valve (home of the most incredible company handbook of all-time) and Gabe Newell's subsequent pivot from supporting Oculus to launching their own competing VR efforts with the Vive 
  • Team changes at Oculus post-acquisition


Hot Takes:

The Carve Out:


We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
April 11, 2017

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
April 11, 2017


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
April 11, 2017

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
April 11, 2017

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
April 11, 2017

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
April 11, 2017

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
April 11, 2017

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
April 11, 2017

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
April 11, 2017

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben:                 Hey Acquired listeners, Ben here. You’ll notice for the first 8 minutes or so of the episode, my audio quality isn’t the greatest. But bear with us, it will be crystal clear for most of the episode. Thanks.

Is ocular and occluded from the same root?

David:              I don’t know.

Ben:                 I don’t know either.

David:              Anyway, we can get with it.

Ben:                 That feels right because I think that's their logo, right?

David:              It’s an eye, yeah.

Ben:                 Yeah. All right, I can see.

Ben:                 Welcome back to Episode 35 of Acquired, the podcast about technology acquisitions and IPOs. I’m Ben Gilbert.

David:              I’m David Rosenthal.

Ben:                 And we are your hosts. Today’s episode, we’re covering the Facebook acquisition of Oculus, a much requested episode by a lot of listeners in the Slack and one we’ve gotten a lot of email about. So we’ve now got enough distance from the acquisition that there’s a lot more to come but we feel comfortable covering it.

David:              No doubt about that. We thought now would be a good time to do it given some of the themes we talked about on the Snap IPO episode, that this would be a good counterpoint, a sort of different approach to a camera company.

Ben:                 Indeed. So before we dive in, we have some incredible listeners that leave some great iTunes reviews and sometimes they’re even a little host deprecating, but we love them all the same as long as they’re 5 stars and they help us grow the show. So as we mentioned a couple episodes ago, if you leave one that we think is worth reading on the air, we’re going to go ahead and do just that. So one we’ve got from DanielX is an emoji review which is trophy, bag of money, unicorn, which I think is quite appropriate. This one’s a little... I had trouble parsing it at first and then I was like, “Oh, I see what they’re doing.” The subject is “Yup, yup” and the description is “That’s one of my favorite phrases Ben uses. ‘Oh man, yeah, and super interesting’ are up there too.” So I'm now going to be incredibly self-conscious every time I use those phrases. And thank you so much.

David:              We love you just the same, man.

Ben:                 And the username on that one is ActiveUsers. So thank you to all the active users out there that really appreciate my catchphrases.

David:              That’s great.

Ben:                 All right, moving on, and happy to leave that behind. But the point we’re trying to make is, leave us iTunes reviews. It helps us grow the show. We love it and hopefully, if you’re creative then we get to share it with the rest of our audience. Speaking of the rest of our audience, we’ve got a Slack, so join us @Acquired.fm. You can join the over 500 of us that are in talking about tech, M&A and any news that comes up between episodes.

And lastly, before we dive in here, we have an excellent sponsor of this episode which is Silicon Valley Bank. Since we’re doing Oculus, I working with the folks at SVB and got introduced to a managing director there, Derek Boyt who is a proper VR nerd himself. So here’s a quick cut to a Q&A with Derek:

Before we dive into this episode and talk about VR and Facebook and Oculus, why do you think VR is important to Facebook?

Derek Hoyt: “You know, much like I would have never predicted that friends or spouses would be sitting next to each other just staring at their small screens, I think a lot of people today have a hard time wrapping their heads around where VR is going to be going. That may be just driven by the price point of the hardware, the wires that are hanging out of the headsets, etc. But once that form factor is more appealing and the processing and resolution is no longer a barrier, I could see mass adoption being realistic. And given their platform and their reach, I just think Facebook needs to be ready for that.”

Thank you, Derek, and thank you, Silicon Valley Bank. Now, on to the episode. David, can you take us through the acquisition history and facts?

David:              I will, as always, Ben. So we pick up our story of Facebook’s 2015 acquisition of Oculus, the virtual reality company. In 2010, when a 17-year-old homeschooled kid in Long Beach, California named Palmer Luckey was taking – he’d been homeschooled for his education up till then and he was taking some classes at Cal State, Long Beach, and he had a problem. And his problem was that he loved video games and he loved the PC games in particular, and he loved them so much that he had created this massive setup at home where he had six monitors and wanted to get like as immersed into the games he was playing as possible. But even with all these monitors, it still wasn’t good enough. He wanted to get deeper into the game. While I was writing this, I was thinking about the EA Sports tagline “It’s in the game.”

Ben:                 I think I read somewhere he had like the largest collection of HMDs (head mounted displays) of currently existing or hacked together hardware in the world before he set out to build Oculus.

David:              Yes. So, well, his problem was he wanted to literally get into the game. And so lots of kids, myself included, wanted to do that when I was 17. But Palmer actually did something about it. So he went over to USC, and USC has this thing called the Institute for Creative Technologies which is a lab that was created there in 1999 and it was actually funded by the Department of Defense. The idea is that in LA, they would combine sort of the resources of USC, a major research university, kind of all the special effects technology in Hollywood and the video game industry which has a huge base in LA. And they used it to build advanced training and simulation technologies. What that meant in practice was virtual reality.

Ben:                 Yeah. And it feels a great thesis to me. It’s funny thinking about funded by the Department of Defense. Boy oh boy have we seen that as a tech theme over and over again in a lot of these companies, either the companies themselves or the research labs they come out of or even the history of Silicon Valley and the importance of how the semiconductor came to be.

David:              Yeah. So Palmer, a 17-year-old kid in Long Beach, he talks his way into getting a part-time job at the ICT at USC and he’s working on a team that’s trying to design cost effective virtual reality. But he still even wants to move faster, so in his parents’ garage, he starts hacking away with basically like components from smartphones, trying to make the device that’s really going to achieve his dreams which is be able to play video games in virtual reality. And at the same time, he’s on the internet natively as all kids are back then in these days and he hangs out in forums online and in particular, at this one forum called the Meant to be Seen 3D discussion forum which is, I don’t know if it was the largest but it’s certainly a very active internet forum dedicated to trying to create virtual reality devices at the time.

Ben:                 Yeah, man. Forums were like that’s where everything happened back in the day.

David:              Totally. It’s like the more things changed, the more they stayed the same, right? The original like Netscape and ARP in that days.

Ben:                 Yeah. But predating forums or mailing lists and Usenet, it’s just a constant reinvention of the same thing. People seed community, internet is incredible for community, revision, revision, revision, revision.

David:              Yup. And now we have virtual reality. So maybe the next great entrepreneurs will meet on Oculus sort of vibe.

Ben:                 Yup.

David:              So he’s posting progress as he’s building these prototypes in his garage on the Meant to be Seen forums. And it turns out that among the other posters on the forum or lurkers on the forum is a guy named John Carmack and that name might ring some bells for some of our listeners. John is probably one of the most famous people in the video game world. He was the cofounder of id software and id created and John in particular pioneered a lot of the techniques.

Ben:                 Is that Doom, Quake?

David:              Quake, Doom, Wolfenstein 3D. You know, all of the first generation of first person shooter PC games.

Ben:                 Yeah. I think one of his greatest contributions was the algorithms to do the shading of shadows so that things look appropriately far away and appropriately lit as you approach them or turn corners. Or things that we take incredibly for granted today but were actually required a lot of complexity.

David:              Yeah. I mean, I remember, gosh, I was probably in middle school when those games were coming out and like, they were so far advanced versus anything else on the PC at the time, PC or like the NES. So, Carmack is on the forums and he’s on the forums because he is also interested in VR and he kind of shares Palmer’s dream that playing video games in VR is going to be a totally new paradigm and really, really compelling. And actually, Carmack’s dream, id had release Doom 3 recently. He wanted to port Doom 3 into VR and so he sees all the progress that Palmer is making and he reaches out to him.

Ben:                 And there’s no great hardware out for VR, right? Like if anybody wanted to port to VR at this point, it’s like highly specialized installations in science centers and stuff, right?

David:              Yeah. I mean, basically it’s the kind of stuff that USC is doing at the ICT for the military or science applications. We’re talking hundreds of thousands of dollars for a room scale installation. Nothing like what the Rift becomes which was you could go on Oculus’ website and order a development kit for $300. So Carmack reaches out to Palmer, asks if he can buy a Rift and Palmer apparently says, he says in an interview later he decided he was just going to play cool and he’s like, “Oh, I’ll just give you one.” So he does and it’s fortunate for him and for the future of VR that he did. This was, we’re now into 2012 and John Carmack goes to ER which is one of the two big industry conferences for video games. The other one is GDC which we’re going to talk about in a minute. But John goes to ER in 2012 which is in June and he gives a big talk and he talks about how excited he is about VR and he shows, he demonstrates a version of Doom 3 that he’s created that is running on the Rift. And the Rift is like a totally hacked, duct taped together prototype that Palmer had sent him.

Ben:                 It was actually duct taped, right? Like there was an actual meeting with them where he actually duct taped the display to the head mounting piece.

David:              Yeah, there are great videos online and of course, after this all the tech and video game press covers this and then goes and tries it out and wears it, like the unit is actually duct taped together.

Ben:                 Just like ridiculous watershed moment when John Carmack is deviling on your hardware at E3. This is pre Kickstarter, is that right?

David:              So this is pre Kickstarter. There’s not even a company yet. It’s literally just Palmer working on this stuff and he’s at this point I believe either 18 or 19 years old.

Ben:                 Crazy.

David:              Totally crazy. So E3 2012 is the big moment for the artist that would become known as Oculus. And a few other folks in addition to the entire video game industry sort of take notice and two of the folks who reach out to Palmer, when they hear a story about this, are two guys named Brendan Iribe and Michael Antonov who also were in the LA area. They had been cofounders of a company called Scaleform which was a sort of a videogame UI technology company that Adobe had acquired several years earlier. They worked at Adobe for a while and then Brendan actually had left and he joined a company called Gaikai which folks in the videogame industry might remember was a streaming video game company that Sony acquired a couple of years earlier and the idea being – and actually a lot of consoles use this today that rather than buying a game on a physical media or downloading it, you can play a game just by streaming it over the internet.

Ben:                 Oh yeah. I remember Microsoft showing some tech like this too where the whole idea was that you’re done with downloading the bits to your device and in fact on this is actually a Windows phone demo, the device hardware constraint, with this amazing cloud computing and we’re going to in a low latency way stream your interactions back up to the cloud, the game computation is going to happen in the cloud and then stream it back down to your device and it will feel native. I feel like I’ve seen a lot of those demos and the trend seems to be toward powerful clients still, like we haven’t gone to this world where gaming is happening with a –

David:              It’s never totally worked, right? I mean, the dream is really cool that like on any client as long as you have a fast enough internet connection, you don’t actually have to do all the hard rendering on the client. It can all be done in the cloud and just streamed as video but it’s never quite lived up to the promise.

Ben:                 Yeah. I think this is kind of a tech trend for me later but I think to quickly derail into it, we continue to pursue this dual track of pushing the envelope on desktop grade or even – it’s called desktop grade gamer PCs so you see the Oculus hooked up to really crazy towers and then simultaneously what we were trying to do in a low power way on phones, like phones keep getting more powerful and the processors in phones keep getting better at originally apps and casual games and now a little bit more serious games on mobile. And we’re definitely seeing the trend of anyone who is interested in pushing all the intense compute up to the cloud for games that are played on mobile, well mobile got good enough to largely just play them themselves and then the ones that require better experiences, the intense sort of R&D pushed the envelope of what can be done is really still being done on towers and that’s not going away anytime soon.

David:              Yup. And especially in VR. One of the things limiting the market right now which we’ll get into is, you need a super powerful PC to make this stuff work, which not that many people have anymore.

Ben:                 Yeah. I remember – really not interrupting a lot – but as a quick aside for listeners, I remember going into David’s office like a few years ago at Madrona and he’s like putting together this crazy tower to hook up his dev kit Oculus to and telling me about how VR is here, like we’re looking seriously at this now, like it's the future, like people or maybe not a consumer option right away, like no one has a tower, nobody can buy a $4,000 gaming rig. Like that’s still kind of the state of good VR right now.

David:              Yeah. I mean, we’re going to get into it but we still have that at Madrona and the thing weighs about 50 pounds. It’s huge. But anyway, so Brendan and Michael coming from Scaleform and Brendan immediately from Gaikai, they reach out to – they’re really excited about this. They’re game guys and business guys in the game industry, reach out to Palmer and basically convince him that there’s a big company to be started here and that they want to start the company together. So the three of them get together with a few other folks who are the initial engineers. Brendan is the CEO of the company. They found the company kind of in June-July 2012 and then immediately afterwards they launch the Kickstarter in August 2012 which Palmer had been planning to do before him and right after E3 but got delayed as they were starting the company. And the Kickstarter becomes hugely successful and I actually went and re-watched it right before we recorded this and, like, it is great to watch but so funny knowing the history of what happens immediately thereafter. So Carmack is featured heavily in the video as are folks from Valve including Gabe Newell.

Ben:                 What?!

David:              The founder of Valve. Go watch the video. We’ll link to it in the show notes. He gives a kind of glowing discussion of Palmer and the future of VR and he says, “We strongly encourage you to support this Kickstarter.” We, meaning him and Valve.

Ben:                 Oh, my God. That’s awesome.

David:              It’s so awesome. So on the strength of this –

Ben:                 And for listeners that don’t know why we’re saying that’s awesome, like Valve and HTC would go on to create the only serious competitor to the Oculus right now and arguably better. Anyway, leaving that aside, the Vive, it’s hilarious to see him on Team Oculus at the start.

David:              Well, and Valve’s had such a long history with trying to get into VR but they finally do it right after the Facebook acquisition. So the Kickstarter is hugely successful. They had set an initial goal of $250,000. They end up raising 10 times that. There is almost $2.5 million and then they do something really smart which is after the Kickstarter ends, they basically just continue it on the Oculus website and anybody can go there and order a developer kit for $300.

Ben:                 This was like earlier in the crowdfunding era and it’s like amazing to see. You know, if you’re an entrepreneur and you’re trying to just put together around to 250k, like you don’t want to raise 2.4 million because you give up your whole company. But like isn’t crowdfunding great where there’s no equity, so it’s just like money for you to play around with. And sure, you have to fulfill those pre-orders and that’s the biggest issue with Kickstarters, but like what an amazing model to bootstrap a company and get some cash in there long ahead of when you’re going to ship the units.

David:              Yeah, totally. And they turn it around pretty quickly but when they put the preorders up on the website after the Kickstarter campaign, there’s so much momentum continuing that they’re selling supposedly for the first couple of days that it’s up on the website, they’re selling four to five developer kits, DK1s as they come to be known. “DK” for developer kit, the first one. At four to five every minute at 300 bucks a pop which is pretty impressive.

Ben:                 Wow, yeah.

David:              So they go along and they’re working on shipping the developer kit. They start shipping it and by the summer of next year, June 2013, the VCs start to get wind of what’s going on down there in Southern California. The company ends up raising a $16 million Series A co-led by Spark and Matrix. Then that’s in June of 2013. Then right after the first, well, company-wise, a first really big victory happens that John Carmack actually decides to leave id and join Oculus as the CTO. And this is a huge, huge moment in the gaming world for the company.

Ben:                 Actually, someone who wasn’t following it that closely at the time, this was the first time that I took Oculus seriously and I didn’t realize that Carmack was in the video or presenting on stage. This is the first time I had heard his name associated with it and suddenly it was like, “Okay, this company is serious.” Like the creator of Doom and Quake is joining as their CTO.

David:              You weren’t the only person to notice this. They had obviously raised the Series A that summer but Marc Andreessen and Andreessen Horowitz also noticed that John Carmack has just gone and left id and joined this baby virtual reality company based down in Southern California. And in December, a couple months later, Andreessen Horowitz ends up leading a $75 million Series B in the company and Marc Andreessen joins the board.

Ben:                 So, what was the time between that Series A and Series B?

David:              It was 6 months or less.

Ben:                 Wow.

David:              And the other sort of foreshadowing of the future here, Marc of course, and why this is important to the story, also happens to be on the board of another company that’s going to get involved here which is Facebook.

Ben:                 Yeah, that’s convenient.

David:              Yes. So that was December 2013. A couple months later, GDC, which as I mentioned is the other big industry conference in the video game industry and that happens in San Francisco, that’s in the beginning of March, and Oculus announces that they’ve been successful with the DK 1 and they’re coming out with a new version of the developer kit. So still focused on shipping these to developers, they’re not ready to release a consumer device yet but they announce the DK 2 and that that’s going to be in shipping in July 2014. And the DK 2 is vastly improved over the DK 1.

Ben:                 I think, yeah, the DK 2 is the first one I had tried and I remember putting it on and being like, okay, this is very different. I understand what the hype is about now but I still wasn’t like, this is the next tidal wave. But then the one after that, I think the Crescent Bay, which I don’t know like how many different parts they have in there.

David:              Yup. They never actually sold the Crescent Bay. That was sort of like the first iteration of what would become the consumer version that they had shipped in 2016.

Ben:                 Yeah. I think I tried that at 2015 CES and they take you into this private room. You have like a 15-minute little demo with it and that was the one, the Crescent Bay was the one where I was like, “Okay, this is the next tidal wave of technology.”

David:              Yeah. And really, the DK 1 still had a lot of the duct tape heritage in it. I’d say the DK 2 did from like a software perspective. But from a hardware perspective, it was pretty good and it had solid components in it. And when you used it, it really enabled the average person couldn’t I think just buy one off the internet and set it up on their laptop. However, if you had a friend or knew somebody who had a setup with the DK 2, you could put it on and it would kind of just work and you could see what was so amazing and how different and immersive VR was versus just playing a regular video game. So that was the beginning of March and then very shortly thereafter, our recurring character on Acquired, Mark Zuckerberg, comes knocking and he gets in touch with the company and says, “Hey, I heard some really cool things about what you’re doing. I’d love to get a demo.”

Ben:                 Do you know how that introduction was brokered? Is that through Andreessen or like do you just get an email from Zuck at Facebook that’s like, “Hey”?

David:              I don’t know. Maybe out there, listeners if you know, hit us up on Slack or shoot us an email. I assume that there were easy channels to make that introduction happen. But somewhat like the Snap, our original Snapchat episode, Zuck I believe, as the story goes, asked for them to come up to Facebook’s campus and do a demo up there. Brendan responds to him and says, “Hey,” and this is from an interview with Brendan after the acquisition, “Hey, actually it would better if you come down here because we have a better setup here.” So just like he did with Evan Spiegel.

Ben:                 “So get on your private plane and fly down to Irvine.”

David:              Mark flies down to Irvine, meets with Oculus, is really impressed with what he sees and says, “Hey, what can Facebook do to help you?” And that quickly leads into acquisition discussions. So by the end of the month, the deal’s done. It gets announced. Facebook acquires Oculus for $2.3 billion in total, of which interestingly, only 400 million in cash, 1.6 billion in Facebook stock, and then there was an additional earnout of 300 million. But this was similar to the Instagram deal and the failed Snapchat deal from the year before and WhatsApp. This is sort of cementing Facebook and Mark Zuckerberg’s reputation as a very aggressive acquirer.

Ben:                 I think, again, we always bleed into tech themes here but like it’s really exemplifying Facebook’s FOMO. I mean, their fear of missing out where they see something that they’re not currently working on that is either something with an existing strong network effect like a WhatsApp or Instagram that could unseat them, or a powerful new piece of technology that could become the next wave of computing and if they’re not on it, they’re kind of screwed. So they very masterfully had an M&A strategy to kind of make sure that they stay on top and don’t act like the social networks of years past.

David:              We’re going to get into this in the rest of the show but I think what’s so cool given how often Facebook has showed up on Acquired and both the IPO and the acquisitions we’ve talked about, you can really see how and why this philosophy came to sort of rule the day with Mark and at the company through the IPO when they had the huge disaster with mobile, and Mark realizing as a CEO and the company realizing that they had missed that wave and they needed to paddle over to it with all strength ASAP and that included acquiring Instagram.

Ben:                 I saw a fascinating stat that I hadn’t even think about, is that Facebook was constantly referred to as a website when they launched and for years after. And in 2008, they launched a mobile app but nobody referred to them like as an app company, and it really took them like four whole years after. So they founded in 2004, app launched in 2008, still largely a website even though they had an app and it took them all the way until 2012 to be taken seriously as a mobile company. And now, 84+% of their revenue comes from mobile advertising. I think that it’s interesting to note that it takes time even though you are on a platform or have a technology to make that the competency of your company and I think that Facebook saw an opportunity here to not let VR evolve around them and then have to play catchup and get on that platform, like turn the company to be centered around the platform. This is an opportunity to say, you know, we don’t know exactly what it is yet, if Oculus by Facebook is the platform and other people are on it or if Facebook is delivered over VR through Oculus. That much is unclear. But what is important is they can’t afford a four-year lag before starting to play on a platform and turning the company to be centrally oriented around that platform when that’s the one that everybody is on.

David:              It’s interesting, you look at the billion dollars they spent for Instagram, the $19 billion they spent for WhatsApp, the $3 billion they offered Snapchat, those were all examples of they were too late and they needed to come in and take out these – unsuccessful in Snapchat’s case – take out these threats that were popping up within their current domain. But $2.3 billion was a lot of money to spend for a wave and a technology and a modality that was even then, you know, I think if rational, cooler heads prevailed at that moment looking at the company, it was still a long way away. We’re here in 2017 and it’s still a ways away even three years later.

Ben:                 So okay, what was the date of the acquisition?

David:              It was March 2014.

Ben:                 So that 75 million Series B was in December of 2013. So moving away from the Facebook side a little bit and looking over at the Andreessen side of this, they invested 75 million and then just a little over three months later got, let’s see, 20x?

David:              I don’t know if it’s official but in researches, I believe the valuation of the Andreessen round was between 300 and 400 million.  

Ben:                 Wow. So let’s call it a 10x? I mean, somewhere in 8x.

David:              Slightly less than 10x, but still, that's a lot of money.

Ben:                 Good for them.

David:              Yeah, great for them. We’ll get into acquisition category in a minute here but the story doesn’t quite end unfortunately for Facebook when they acquire the company because two things happen over, well, starting immediately but play out over the next couple of years. One, it turns out that Carmack, as important as he was and I really think the Oculus the company and the technology wouldn’t exist without him, unfortunately his former employer, id software which itself had been acquired a couple of years before by a videogame conglomerate called ZeniMax, they also agreed that Oculus wouldn’t exist without Carmack and his contributions and they end up suing Oculus and Facebook, alleging Carmack a couple of things. One, that Carmack had stolen critical IP from his work at id and taken it to Oculus. And two, actually, in 2012, Palmer Luckey met, I don’t know if it was when he was meeting with Carmack or with other folks at id, had signed an NDA with the company and as a result of everything that happened, ZeniMax is alleging that he had violated that NDA.

Ben:                 And alleged and then?

David:              So that lawsuit hits almost immediately after the acquisition and then only just a month ago as we’re recording this, in February of 2017, a jury in Texas, which id software was based in Texas, is based in Texas, actually rules in favor of ZeniMax a $500 million judgement against Facebook and Oculus. And Facebook has said that they’re going to appeal but still, that’s not good.

Ben:                 Yeah. I mean, that takes it from a –

David:              2.3 up to 2.8. But it gets even potentially worse in that ZeniMax has also filed a court injunction arguing that the court should halt sales of the Rift which would just be terrible.

Ben:                 That’s a far more serious blow.

David:              It hasn’t happened yet but it is potential and clearly they’re posturing and trying to bargain between the parties here. I did some research on ZeniMax for this and it’s quite a large video game conglomerate. They own a bunch of studios including the one that makes – video game fans among our listeners will know the Elder Scrolls, the Fallout series. But guess who is on the board of ZeniMax?

Ben:                 The only thing that wouldn’t surprise me is Carl Icahn.

David:              No. But almost as good. So they have quite the cast of characters. They have Cal Ripken Jr., the Iron Man.

Ben:                 Oh my God, the Iron Man!

David:              The baseball player, yeah. Jerry Bruckheimer, the movie producer. And in addition to Leslie Moonves who is the CEO of CBS. But this is really the kicker, I just couldn’t believe it when I read this. Robert Trump, Donald’s Trump brother is on the board of ZeniMax.

Ben:                 What?

David:              The internet says it’s true.

Ben:                 Boy, what a weird company. God, conglomerates are weird, man.

David:              Yeah, totally weird. So you can’t make this stuff up. Truth is in fact sometimes more stranger than virtual reality.

Ben:                 Yeah. You know, we’ll have a follow-up, I’m sure. Probably not an episode but this will be in follow-up in a future episode. But I suspect you’re right that the injunction to stop selling the Rift is just posturing and trying to get potentially a settlement or more out of the current ruling or something. And it would shock me if they stop shipping the Rift because it is but it does feel like Facebook is going to pay some more money there.

David:              Yeah, or at least it’s posturing perhaps trying to get Facebook to drop their appeal. But the other major thing that happens after the acquisition that we’ve alluded to on the show is that Valve and Gabe Newell decide that rather than just supporting Oculus, they actually want to get into virtual reality themselves. So the next year at GDC in 2015, Valve unveils in collaboration with HTC, the Chinese consumer electronics company, they unveil the Vive which is in many ways a superior product to Oculus and the Rift. The Vive has two key innovations that the Rift doesn’t have at that point. One are true hand touch controllers, so when you would play experiences or games on Oculus before Valve came out with the Vive, you would have to use either a keyboard and a mouse or a video game controller, an Xbox controller. That’s just totally –

Ben:                 Boy does that pull you of the experience.

David:              Really pulls you out of the presence which is the whole point of VR. Valve shifts these controllers that enable you to move your hands around and grab things and pick things up and interact much more naturally with the environment. Then they also have while it’s still tethered, the headset that you wear still has a cable coming out of it and it attaches to the PC, they’re called “lighthouses” that are laser positional tracking boxes that you put in the room and they’ll allow you to walk around the room. So you’re no longer just sitting on a chair with your hands on a videogame controller like the old videogame paradigms, but it really changes this into a much more immersive experience.

Ben:                 And boy, what a brilliant freaking end-around by Valve. Like they’re a software company. For listeners who don’t know a bunch about Valve, they’re a software company. They make games and they make a platform called Steam. I think they make most of their money from Steam and they get a cut of all of the distribution of the games that go out over Steam. And Steam is sort of the default way of your PC game to go and get new games to come out. So basically they own the pipe. And they’re a super wacky company. Brilliant, brilliant engineers there, brilliant game designers that of course are interested in VR, but like, they’re not going to make hardware. That’s not in their core competency at all and they’ve been, as David alluded to, trying for years to figure out what they right way to get into VR was and for them to be able to closely track and be a fan of Oculus, see that fall into Facebook’s hands which they’re loosely competitors, right? At the very least you don’t want to put too much of your company’s stake in Facebook’s control. And to be able to in that tight of a window turn around, find a hardware partner like HTC and get into market with a superior product, like there’s a lot of things that we’ll conclude out of this episode but one of them is that there are people at Valve and HTC that are executionally brilliant.

David:              Valve is – we’ll link to this in the show notes. I suspect a lot of our listeners know the company well but for those that don’t, it is a fascinating place. Their employee handbook leaked on the internet a few years ago and it's more like a manifesto. There’s no hierarchy. Nobody reports to anyone else there. Everybody decides what they work on. Everybody’s desk is on wheels and if you decide you want to work on something else with other team, you just move your desk over to wherever that team is and you start working on whatever they’re working on.

Ben:                 I believe it’s 100% owned by Gabe Newell, so there’s not a lot of leaks of stuff from shareholders or public disclosures or really even like known market cap of the company.

David:              Yeah, it’s very, very closely held. I don’t believe Gabe owns exactly 100% but he definitely controls the company. Just one person. They make, you know, nobody knows outside of Valve the exact number but a lot of money, billions of dollars of revenue mostly from Steam, as Ben mentioned.

Ben:                 If there’s an opposite podcast to Acquired, or in the corp dev parlance, Acquired is often about the buy, not the build. If there was a podcast that was about the build decision instead of the buy decision, we would really want to examine what Valve does here and what their existing business with Steam sort of allowed them to do in going into VR and taking this very expensive risk on something that has super unclear business value especially when they start the venture.

David:              I don’t think there’s really any two ways about it. They out-execute Facebook and Oculus over the next two years. Facebook ends up shipping the consumer version of the Oculus Rift before Valve by a week. So the consumer version of the Rift comes out at the very end of March 2016, and at the beginning of April, Valve ships the Vive but again with these two key innovations that Oculus doesn’t have and it’s not until December 2016, so just a few months ago now that Oculus finally brings out their touch controllers which brings them closer to parody with the hand controllers of the Vive.

Ben:                 I mentioned earlier that the Crescent Bay woke me up to the idea that VR is the next tidal wave in technology. I’d say the next step function was the first time I tried the Vive. I think there was a thing, I think Google might have even made it but it was that thing where you could paint and you use the controllers to paint.

David:              Tilt Brush, yeah. It’s like MS Paint in VR, is the only way to describe it. It was an independent company. A couple developers and Google ended up acquiring it.

Ben:                 Nice. So there’s that demo and then there’s one in the kitchen where you go in and you’re supposed to start to make food.

David:              Yeah, the job simulator.

Ben:                 But really what ends up happening is like you can mess every – like you can just pick up pants and heave it on a wall and knock the – like this is an incredibly thrilling experience of throwing an entire rolling cart full of dishes on the ground and having no consequences. I’d say that was the first time where like I think I was in that thing for like half an hour. It felt like 5 to 10 minutes and that was the first time where I legitimately didn’t want to leave. That was the first time where I was like, “Oh, people are going to get real addicted to this.”

David:              I’d say for our listeners that aren’t into VR, maybe haven’t even tried it yet. Go find. It’s worth it. You owe it to yourself if you care about technology and thinking about where waves are going to break in the future. Go find a friend or go to your local venture capital firm that has a Vive installed and try out a few things. Try out Tilt Brush. It will take you back to the first time you used MS Paint on a PC, if you’re old like me and Ben. Try out. There’s this my favorite, favorite app in VR these days is by our friends over at Rec Room which is a really amazing company in Seattle. The best I can describe Rec Room is you just have to play it yourself and you’ll be a believer about the potential of VR. But that's like the first time I played GoldenEye 64 as a kid and had my first shooter 3D videogame experience. And Rec Room is so much more than that but just that pure fun, it’s great.

Ben:                 The reason is, and we’ll get into this, and I think this is part of Facebook’s bet. I think Zuckerberg, let me read the quote real quick. He has over and over again said VR is going to be the most social platform and I think the super cool thing about Rec Room is like you’re in there just hanging out. You’re in a room, you’re playing paintball. There’s all these different activities you can do but it’s all centered around like you’re just hanging out with other people as if it was sort of real life. One thing I want to dissect later in tech themes is, do you agree that the killer app of VR is a social one? But the cool thing about Rec Room is like when you try, you’re like, “Wow, I really am just hanging out in here and I can do this for hours with other people.”

David:              I said it reminds me of what it was like playing GoldenEye the first time. The single player campaign in GoldenEye, it’s fun, whatever, it’s good. But like GoldenEye was all about playing with your friends and everything, all the talking smack and the hours and hours and hours I spent in high school, in college with my friends playing that, that's what Rec Room is like. It really feels like a glimpse into the future.

Ben:                 Hey, Acquired listeners. I’m jumping in with a quick update. In the next section, we talk about where Oculus is today and recent events involving the team. There was some pretty big news between recording and releasing this episode, so I’m here to tell you Oculus founder Palmer Luckey has left Facebook. On March 30, Facebook confirmed his departure following a long stretch of Facebook being very quiet about Palmer. This came after he denied and then confirmed reports of funding a pro-Trump organization called Nimble America and then did not appear at Oculus’ developer conference. Now, back to our regularly scheduled programming.

Ben:                 Okay. So let’s finish up history and facts. David, you want to take us to the recent events in the last 6 months to a year and then we’ll go on to acquisition category?

David:              I think we’ve kind of done that.

Ben:                 I guess I mean personnel wise. There’s been some really interesting things that have happened as Oculus starts to merge more into Facebook. So Palmer Luckey is no longer the CEO of Oculus but is still at Facebook working on things.

David:              It’s actually Brendan. So Palmer was never the CEO.

Ben:                 Oh right, sorry, sorry.

David:              Brendan Iribe stepped down as CEO. He is now managing Oculus’ “PC” division which is basically the Rift.

Ben:                 Palmer similarly is at Facebook kind of titleless. So the way you can kind of think of of what’s going on at Facebook right now is Oculus is getting more integrated. They’re still the Oculus group that makes the Oculus Rift. Facebook has more independent VR teams. There’s a PC VR, mobile VR, and obviously we’ve seen there’s been demos on stage of these incredibly social experiences that maybe the future of what Facebook looks like in VR, and they’re shipping the Rift. But it’s very clear that whereas with Instagram and WhatsApp, they stay very separate. Oculus is an acquisition where they’re getting much tighter integration with the company and it looks a lot more like a division than it does a separate company. One huge marker of that is the whole team or at least a good chunk of the team moved from Irvine off to Menlo.

David:              Oculus’ headquarters is now in Menlo Park with the rest of the Facebook campus. But I think that’s a perfect transition to acquisition category. I think for me, clearly this is, well, I’m curious what you will say Ben, but to me it’s clearly a business line acquisition. This is a new product, a new platform, not part of the existing wave that Facebook is on that they’re buying. I think it's interesting that they initially kept, they tried to run the playbook of keeping the team totally separate and totally autonomous and in particular kind of at arm’s length the way down in Southern California. But then that didn’t work out quite so well as they got grounded by Valve and now they’re moving at much more, you know, moving to integrate it much more deeply into the rest of Facebook the company.

Ben:                 Disagree entirely.

David:              I love it.

Ben:                 I think it's a technology acquisition. I would say the signaling initially could lead more to a business line of keeping it separate, of it being its own revenue generator. But to me, this is a defensive play on protecting the network that Facebook has and their existing business model. I think that for them, they looked at this and said okay, VR is clearly a future. We need to make sure that we have a position on the dominant technology platform of the future and we are right now at risk of other people building all the hardware and the platforms and us having nothing to do with it, and then having no leverage and making sure that we have a dominant position on that platform. Facebook has seen – I guess the point I'm making is they don’t care about the business line of selling Oculus Rifts to people. I think that they’ve looked around and seen, “Crap, we don’t actually own the direct relationship with any of our users.” They’re in a slightly tenuous position where people are into Facebook They’re on it all the time, they’re on it every day. It’s an essential part of people’s lives and provides a ton of utility. But they access it through either their Apple device, their Android device. Facebook desperately tried to make their own phone. That didn’t work. Like Facebook is in a little bit of a tenuous position in not directly owning their customers. Or at least not directly owning the users that their advertising customers monetize. I think what Oculus is, is them trying to get out ahead and making sure that with this technology that clearly evolves to be the future of computing, that they aren’t going to be upended by someone else who decides that “Eh, we’re not going to prioritize Facebook on the platform where all the users are.”

David:              Ben, I think you hit the nail on the head. It’s about owning the customer relationship at the point of access in the next wave which they don’t right now. It’s fun doing this episode right now and in particular after the Snapchat IPO. But it’s hard to judge right now like I think if they had kept in fully in that like, “Oh, we’re going to keep a separate mindset, this would be a failure.” But now that they’re starting to integrate it more deeply, that feels like the right approach to me at this point.

Ben:                 This is the third time I’ve dangerously danced into tech themes ahead of schedule. But let me throw something out there that I think Facebook would be much better off keeping them separate and keeping it like its own little division with kind of a firewall between Oculus and Facebook. So Facebook is a horizontal company. Facebook needs to make sure that they are on every single platform in the same way so that the most users, in the same way that Google needs the most users, they need scale, can get access to it. The closer they start to integrate these things, the more the danger comes up of them prioritizing Facebook features to be Oculus only and not putting them on the Vive or whatever other platforms come to be. I think when you’re an employee at a company like that, you start to get confused as to what the priorities are. I remember being at Microsoft –

David:              You end up with an iMessage situation.

Ben:                 Totally. And one that I’ve experienced personally is like when you’re at Microsoft or at least few years ago, if you’re in Office, you hear the message that Office is an important business on its own, maybe the most important. But then things happen where we don’t ship Office for iPad because we want to give the Surface a head start and be the only platform with Office on it. So with Office being a horizontal, Windows being a vertical, we take this over to Facebook and say Facebook is the horizontal and Oculus is the vertical. It seems like unless Facebook believes that the Oculus will be or the Facebook VR will be the only VR platform where they will need to reach users, it seems really dangerous to start doing integration and I would argue that they really need to figure out how to make sure that they’re not prioritizing Facebook for Oculus.

David:              This gets into the really interesting part of the show which is we talked about how Snap is clearly thinking about their future and what that’s going to look like in a whatever, augmented virtual mix, whatever-you-want-to-call-it reality perspective. Total aside, why am I talking about this tech themes. But as long as people are debating what to call something, it’s not a wave yet. The wave has not yet broken until like phones are just phones. When you’re talking about like PDAs or smartphones, no. Once they’re just phones, once it’s just like your glasses, then we’ll be there.

Ben:                 But David, the wave is VR, AR, MR. Slash, slash, slash.

David:              Slash, slash, slash. But the breaking of the wave is clearly coming and Snap’s working on it, Apple’s working on it. Valve has a very successful, arguably more successful than Oculus product in the market. So what should Facebook do?

Ben:                 I mean, well, one thing you could argue they could do is actually, let’s move into What Would Have Happened Otherwise. What if they didn’t buy Oculus but they found a way to make sure that Facebook was great on all of these platforms. Like how do they get the leverage to make sure that they have a first-class relationship with customers of VR, or do they actually have to own one of them to have an insurance policy that they’re going to invest a ton of money and making this single VR platform really great. But somehow, they’re going to have the restraint to never prioritize the Oculus business.

David:              I don’t know. I think it’s the question you were asking which I feel like we need to get Ben Thompson on this show to discuss. Like, can Facebook be a horizontal and a vertical business at the same time? I mean, I don’t know anybody that’s ever succeeded at that.

Ben:                 With great restraint, man. Like you just got to make it so clear to all of your employees that like Oculus is an insurance policy, like Oculus needs to be really great but the main business is Facebook. It makes money and it’s going to continue to make money as long as we don’t screw it up.

David:              Easy to say in theory, right? Like I’ve literally never seen that happen before.

Ben:                 I don’t know that you could sell great employees on that, right? If you’re the best VR developer, screw that, I’m going to Valve.

David:              Here’s a potential counterfactual, one we’ve covered on this show: Android. So Google is a horizontal company, Google Search and Google Services, Gmail, Maps, whatnot were great on iOS as on Android obviously. I think it’s pretty clear at this point like we talked about on that episode the mobile wars are over and that everybody within Google is aligned on making those services work great across all platforms, and yet they still have Android. But now here’s what’s key about Android I think to my mind. Google doesn’t make Android phones. I mean, that's changing a little bit. But like the whole strategy was get the software out there, get the operating system, let other people, let other ecosystem partners build a great hardware and get it in the hands of people, and that use Android as a way to make sure that we are going to be able to continue to deliver these great Google services to everybody across all platforms. (A) Do you think that that’s a viable strategy? (B) Can Facebook do that?

Ben:                 Totally a viable strategy. Very interesting. The main takeaway for me is Android itself doesn’t make money. It prevents Google from having to give money to other people like Apple.

David:              Well, they do give, as we talked about, a lot of money to Apple.

Ben:                 Yes, but they could give many times more money to Apple if Android didn’t exist.

David:              Yup.

Ben:                 And for listeners, that’s the search engine affiliate revenues that they pay out to wherever the search originates from.

David:              So Google pays on the order of a billion dollars or more every year to Apple in order that Google remains the default search engine on the iPhone. Actually, it’s not just like a straight payment. It’s that Apple actually gets a cut of Adwords revenue. So it’s like a variable rev share for Adwords that are served on searches on the iPhone.

Ben:                 Yeah, good to be Apple there. So I think that –

David:              It's good to be Google. You’ve got the best business model of all time.

Ben:                 Yeah. So the Android strategy, I mean Facebook totally could build like Oculus OS and then have a reference design and they do the same thing that Android did and have third parties build the hardware. I mean, is that what Daydream is? Is Google sort of taking that approach with Daydream VR?

David:              I don’t know enough about it to say for sure but I believe it is similar. Except that it’s on Android phones that are powering it. So there is that wrinkle. It’s not like it’s Daydream as far as I know, I could be wrong. But I don’t believe Daydream is going to work on like iOS.

Ben:                 I think you’re right. So getting back to the other point that you’re making though. I’m not sure it actually buys Google or Facebook much to build the sort of VR software layer and then let someone else do the hardware. I mean, maybe it does. I haven’t actually really thought through that. I mean, clearly that’s the approach that Valve is sort of taking that like they’re going to continue to make money from Steam, and Steam is going to be on all the Vibes, and HTC, you take on all that hardware difficulty and risk and cost for making the hardware.

David:              Well, it reminds me a little bit. I hadn’t thought about this until you brought it up a couple of minutes ago. But I think it kind of comes back to Microsoft too, right? That’s what Microsoft did with the PC which was build the operating system, give it to everybody, get it out there. It’s great that Apple exists, right? Like we’ll make Office for Mac too. But I think there are plenty of examples whether it's Microsoft and Windows or Google and Android of that type of approach working. It’s when you then crossover into trying to be both vertical and horizontal that you get the Office for iPad situation.

Ben:                 I think it keeps coming down to this. They just have to figure out a way, and Google took years to do this to be clear that Android exists to power the search advertising business. It has to be first class and a great OS on its own to have people use it because it’s in a competitive landscape, but like it doesn’t exist on its own to be Google’s main revenue stream. And Facebook is just going to have to do the same thing with Oculus and hopefully there’s less tumbles on the way to get there.

David:              Totally.

Ben:                 So, what would have happened otherwise? We’re kind of in this section right now but if Oculus doesn’t land at Facebook, what happens to it?

David:              Well, that's a really good question. Because they’d raised a lot of money really quickly but it was going to take a lot more money to get to where we are now and clearly, I think if Facebook doesn’t acquire Oculus, there’s a chance that maybe Valve continues to partner with Oculus and doesn’t go off on its own. However, given that they did and if they had and Oculus was still a lone independent, they would have had to do something because we saw with the execution that Valve had, when you bring the resources and the huge amounts of money that a corporation like them can to building new technology like that, they were just going to blow Oculus out of the water. Oculus probably only was able to hang out because they had Facebook’s resources. So I think it’s hard to imagine Oculus remaining an independent company, a fully independent company without needing to. I guess as we’ve talked about with both Snapchat and Uber and Didi, it is possible to raise huge sums of money these days. But I think it’s not just about the money too. It’s about being able to get the right OEM partnerships. Think about how many years and how much effort Apple has invested in creating their supply chain. The idea that a startup would be able to do that within a competitive landscape is hard to imagine these days.

Ben:                 Actually, here’s a great quote from Palmer Luckey. He said, “I’d say we are 5 years ahead of where we would have been without the acquisition, pointing to the resources needed to improve the hardware technology as well as encourage software developers to build games and videos to watch on it. There’s a strong argument to be made. We would never have gotten there in 5 or even 10 years.” There’s a great point that the Facebook brand boosted the network effect that developers are making stuff for it too.

David:              We’ve sort of talked about the evolution of the Rift hardware. The DK 1 was one step past duct tape. But the DK 2, but then the consumer version, like these are true good consumer products. Even with a lot of money, would they have been able to create that? Okay, tech themes.

Ben:                 Real quick. What about the flipside of that? What would Facebook have done in VR without Oculus?

David:              Well, Facebook still hasn’t done much in VR. I mean, that’s the other thing that, you know, it’s just so early, right? Even three years later after the acquisition, best guesses are it’s growing and growing quickly but I bet there’s certainly still well less than a million daily active VR users out there in the whole world, compare that to like 6 billion daily active users, 6 billion in mobile. So I think Facebook is still totally fine.

Ben:                 I think so too. Which is interesting to think about in grading the acquisition as they’ve so far paid $2.8 billion for a thing that they would have been completely fine without, but it’s a long bet.

David:              Yeah. Tech themes.

Ben:                 Running through my list of I’ll just say like check next to the ones we’ve really already talked about. But Facebook doesn’t want to get left behind like they did with mobile – check, we already talked about that. Owning the customer relationship, okay. Here’s the one that I really want to posit to you. So Zuckerberg often says that Facebook is going to be or VR is going to be the most social platform. I’m curious, do you think that that’s actually where VR is headed? Or is Zuckerberg saying this because it’s like a mash of Facebook is the company that connects people and it makes the world more open and a connected place. Also, VR is the future, so we therefore must mash these things together because our business must survive in the world where VR is the future. Or do they actually have a good confluence and work together well?

David:              This is maybe foreshadowing my grading. I think he is both 100 percent right and Facebook and Oculus have executed poorly on it. I think if you look at the vision that Snap is putting forward of a camera company, which is the closest that I have seen to anything resembling normalcy and a true wave in what we’re talking about because like I said, the wave is not “VR or AR or MR”, it’s glasses or a camera. It’s something that real people everywhere are going to use, people who don’t listen to this podcast. So I think he’s right and I think just look at Snapchat or look at Rec Roo, I mean honestly, that to me is the example of what’s most compelling in this medium is actually being there and playing with people or doing things together with people. So I think he’s right.

On the other hand, I think if you look at the product strategy and the history over the last couple of years on what Oculus and Facebook have done, they’re behind because it’s natural hand movements that are so important to that. It’s walking around. It’s types of thing that Valve has done with the Vive but it's also what Snapchat has done which is like to really make this mainstream, you need to get out of the PC entirely. You need to make this something that people are going to be open with in the real world interacting with other people.

I think we’ve talked about a bunch of my themes too. The only one I’d say that we just got a brief mention earlier in the episode but really came out for me thinking about this and doing the research is Kickstarter. Like Oculus, the Rift being one of the first, not the first but one of the first really breakout companies/product/ideas to come out of, creative endeavors to come out of the Kickstarter platform. And that reminds me of what I think is a deep theme in technology that anytime you can build a platform that enables other people’s creativity in kind of ways that you would never imagine, that’s a recipe for something special, whether that’s an operating system enabling software developers to create and distribute anything like the app store or like Windows or like Apple, whether that’s Facebook enabling anybody to share anything that they want to write or say, I think Kickstarter is just a really cool example of that, and led to Oculus.

Ben:                 I think that's a great point. Should we grade it?

David:              Let’s do it.

Ben:                 So I think you foreshadowed this a little bit but like the strategy of Facebook acquiring the preeminent VR company and paying a lot for that, I think it’s great. So far, if we’re at the date of acquisition I’m like, this should be an A. I really feel this makes lots of sense to me, Facebook needs to be here. I think in the last couple of years of where it’s ended up, I’m going to go with a C for this acquisition with as we’ve said before a high level of variance. So when we revisit this acquisition in years to come, very open to changing that and I think it’s very likely it will be change. But like, holy crap, they bought Oculus and then a year later, a far superior piece of technology comes out and it didn’t seem that hard for someone else to pounce on it and especially someone that was so interested in Oculus in its development. Then on top of that all, I really disagree with Facebook integrating VR tighter. I think they’re potentially at risk of not making sure that they understand that Facebook needs to be a horizontal platform that doesn’t prioritize anything on Oculus. People that work at Oculus should view themselves as working on a thing that makes sure Facebook doesn’t get unseated in the future but ultimately Facebook is the business, like they should look at their competition as Snapchat even though they work at Oculus.

David:              Totally agree. I think you’ve nailed it on this one. I’m tempted to quote Tom Alberg from our Amazon IPO episode himself quoting Jeff which is such a great line in tech that Jeff Bezos is saying that it’s okay to fail at things; it’s not okay not to try. So I want to give Facebook and Mark Zuckerberg a ton of credit for trying here and seeing the potential in VR as a future medium and pouncing on it early. On the other hand, like he pounced really early and execution has not been great since then. So for the same reasons as you, Ben, I’m going with a C on this one so far.

Ben:                 Maybe there’s an abstraction here where we need to say like huh, it turns out if you’re a horizontal that needs to have scale and reach every internet connected user in the world, then maybe you don’t own the hardware platform and like a risk of your business of reaching everyone is that you don’t necessarily own that direct customer relationship. And that just has to be okay, like that just has to be baked into these mega horizontal scale models. Because there’s no way, like could Facebook have its cake and eat it too? Is there a world where the technology behind Oculus was so breakthrough or anything that they acquire is so breakthrough that it is the only hardware platform and then they reach everyone and get to own the hardware? I just don’t see a world where that’s possible.

David:              Well, what you’re talking about is a monopoly on a direct customer relationship and monopoly is a word that gets thrown around in tech a lot usually in conjunction with network effects and the power there. But what’s interesting about network effects, at least in the companies we’ve seen them expressed powerfully so far, very few if any of those companies actually own the means of ingress, so to speak. They own it in a sense in that Facebook owns the app that people come to and spend most of their time in. But they don’t own the phone and Google owns where people find their information but they don’t own the computer or even necessarily the phone, even if it’s Android. I think it’s just made harder or maybe impossible; it's unlikely to believe that Facebook would be able to do that with VR in the future.

Ben:                 Yup, agreed.

David:              Quick follow-ups. So one, Snap. They’re still a public company.

Ben:                 They are still a public company, they have not completely imploded. Their stock is trading below IPO price.

David:              Well, their stock is trading up from where they priced the IPO but it is trading down from where it closed on the first day of trading. The real story will come after they release their first quarter and probably couple of quarters of earnings and we see whether they’re able to reignite growth.

Ben:                 Let’s just hope that everyone that bought in a very excited way on that first day does not become extremely pessimistic right now. Whatever. We’re not picking stocks, we’re not forecasting, we never the time market, blah, blah, blah. I think it’s going to bounce back a little bit and let’s hope for Snap’s sake that the people that bought are in sort of in it for the long haul and understand that too because I think one interesting point that a friend brought up the other day is tons and tons of millennials bought Snap because it’s the first kind of accessible IPO to them that was both large and something they were super familiar with, and people bought on the motion of “I like this company.” You don’t want to see all those people – you don’t have a super negative experience and lose out.

David:              Well, echoes of the Facebook IPO episode. Go listen to that one if you haven’t already. I think that is some of our best work here on Acquired. Okay, other hot take. Intel acquiring Mobileye. Ben, I hear autonomous cars are a thing. Forget VR.

Ben:                 Yeah. Boy, sure seems like it, huh?

David:              Wait, is Mobileye a camera company?

Ben:                 In a sense. It’s more like an applied machine learning company. It’s really fascinating to me. So Mobileye is an Israeli company. They built self-driving car technology and they were bought by Intel for about $15 billion.

David:              A little less than $15 billion, yeah.

Ben:                 What they’re really doing is applied machine learning. To me, this is a company that their core competency is the collecting and synthesizing of all of the training data and building a pipeline out of that so that they can appropriately hook into all of the systems of someone else that makes the car and make the car self-driving. It’s so fascinating to me that as this market gets so much attention so quickly and it’s so clear that this thing is going to happen that by pointing your technology in the right direction and really starting to get market traction with the makers of these cars, like if this company was a machine learning company, they would have sold for a fifteenth of what they sold for.

David:              It’s interesting. I think we might have unexpectedly on the episode touched on a really, really deep theme in technology which is this vertical versus horizontal idea. Ever since we talked about it a couple of minutes ago, I can’t stop thinking about it and thinking about Intel acquiring Mobileye and like okay, yeah, we’re now going to sell this horizontal platform to all the car companies to enable them to compete in the autonomous market. Contrast that with a Tesla which actually used to use Mobileye components, ended their relationship, took it in-house as vertically integrating, taking an Apple-like approach. Very interesting to see how this plays out.

Ben:                 Rewind 20 years ago. Tesla is Apple. They’re vertically integrating. They’re selling a high-end premium consumer product that’s priced and experienced in a premium way. They capture a lot of value and the rest of the value is captured by an ecosystem that is based on Intel, that are basically component makers. It’s like history repeats itself.

David:              I think the question is, and actually Ben Thompson wrote a great piece last week, I believe, the Smiling Curves about this. Question is, can a combination of Intel be the Microsoft, not just the Intel?

Ben:                 Yeah. And could Intel be the Microsoft? Is that what they’re trying to do here, is sort of like level up the stack? Fascinating.

David:              Yup, fun stuff. Future episode.

Ben:                 Intel self-driving OS, we will see if that happens.

David:              Coming soon to a podcast client near you.

Ben:                 Indeed. Speaking of podcast clients, one that you can listen to on your podcast client, my carve out this week is the Pod Save America with Kara Swisher interviewing the gang from Pod Save America at South by Southwest. Pod Save America is the guys that used to do Keepin’ It 1600 on The Ringer podcast network. After this election, moved over to start their own media company called Crooked Media of “Pod Save America”, “Pod Save the World” and other left-leaning, highly cynical, very funny podcasts. If you’re in to keeping up on all the stuff that’s going on and you want some insights from the people that held those jobs in the Obama administration, it’s an awesome podcast. Pod Save America is incredibly entertaining. The Kara Swisher interview is phenomenal because she might be the best interviewer alive. She is so good. Thinking about like, “What do I want to know? What do I think my listeners want to know? I’m going to abuse you until I get those things out of you, and you’re going to like it because I do it in such a fun and entertaining way and let you tell your story, and give you the respect as the person being interviewed and starting from a place of like look, I think you’re really smart and I think you have a lot to share. Why don’t you share those things with us?” There’s this incredible mutual respect between the interviewer and the interviewees, and I highly recommend it.

David:              We look up to her on Acquired and a lot that we can learn and hope to keep learning as interviewers and podcast hosts and journalists in our own random internet way kind of sense ourselves. Mine, real quick for the week. Speaking of left-leaning liberal folks, great article in the New Yorker this week that really made me think, by Adam Gopnik who several years ago wrote this great book called Paris to the Moon which is just hilarious, being in Paris as I am right now for the next month or two. Great satire of the French and of Paris. But he wrote a piece asking the question “Are Liberals on the Wrong Side of History?” in the New Yorker and we’ll link to it. It’s really good. But one of my favorite elements of the piece of which there’s several, is sort of asking this question like what does the course of history have to say about what the themes are behind it, which reminds me of course of our podcast and what we do on Acquired. But Gopnik kind of makes the point that because events turned out a certain way, because Trump won the election, because Brexit happened, etc. or other things deeper in history, like the human mind is such a – this is Kahneman and Tversky classic stuff – is such like a storytelling machine that we seize on to that narrative that like oh well, that was inevitable and it reflects this deep truth. But the reality is, maybe it wasn’t inevitable. Maybe it was a probabilistic thing. Maybe it was even a low probability thing that just happened to happen. I love thinking about stuff like that.

Ben:                 Interesting. Just because it happened, it doesn’t mean it was destined to.

David:              Exactly. It doesn’t mean that you should create or accept a gospel about the truthbehind it, because the truth is complicated.

Ben:                 Sounds very cool.

David:              Cool.

Ben:                 That's all we’ve got. Listeners, thank you so much for joining us, as always. If you’ve been a long-time subscriber, as we mentioned in the beginning and you appreciate the show, we’d love a review on iTunes. Make it something stupid, make it something funny, we’d love to read it on air. It helps us grow the show, get more guests, and really bring Acquired to more people. So yeah, feel free to if this is your first show, subscribe from your podcast client of choice. You can shoot us an email at acquiredfm@gmail.com, go to Acquired.fm, join us in the Slack. Gosh, I don’t know what more I could plug, so I’m just going to call it here.

David:              Find us in VR.

Ben:                 Yeah! Signing off. Have a good one.

David:              Talk to you guys, soon.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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